Norwegian Niche Banks 3Q15

Conclusion

New Norwegian peers still in “the blue”

Online retail and mortgage lender Skandiabanken will likely be listed on Oslo Stock Exchange in 4Q but the remaining new peers Autobanken, Monobanken and ebanken are heavily delayed despite attractive underlying story. As the new entrants is still absent we find it likely with a prolonged high margin scenario. Swedish Nordax was listed on the Stockholm exchange the 17th of June at SEK 45 equivalent to P/B=2.9. On our estimates Nordax will deliver a ROE of ~20% in 2015 and we believe the listing shows the repricing potential in the Norwegian niche banks in general.

Our analysis

• Absence of new peers positive margin wiseWe have hiked our 16e loan loss assumptions given the negative macroeconomic outlook in Norway and we still expect lending growth to abate ahead with ~1-2% per year from avg. 20.7% in 2014. Furthermore we expect the NII margin drop to be ~30bp the next four years despite lower interest rate in Norway. However, due to the penetration catch-up effect, consumer credit growth is ~400bp higher than overall credit growth.

• 3Q15 ROE lowered by financial lossesWith continued high lending growth in 3Q and sustained high margin we find comfort in our conservative assumptions ahead. The high lending growth is accompanied with a high ROE hence niche banks should avoid equity issues. In our scenario analysis we find that the ROE is adequate in raising capital organically if lending growth stay at these levels even though we see 3Q being hit by losses on bond portfolios and despite higher loan losses in 2016e.

• EPS down 3.5% but Swedish listings highlight potentialEven with conservative assumptions we find the Norwegian niche banks to offer attractive returns. The banks offered an avg. ROE of 27.7% in 2Q15 as both yA Bank and Bank Norwegian delivered ROE in excess of 30% last quarter clearly showing the niche bank potential. We hike lending growth marginally in 2016e but make some negative EPS adjustments due to overall higher losses in 16e. We reiterate our BUY recommendation on all the niche banks.